Lason India P Ltd., CHENNAI V. JCIT, CHENNAI

ITA 1026/CHNY/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9248 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 1 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Assessment Year: 2009-2010
• Appeal Filed On: 23-04-2014
• Court: TRIBUNAL
• Department Lawyers: MILIND MADHUKAR BHUSARI J
• Keywords: Depreciation; Transfer pricing; Wholly owned subsidiary

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , ! ' ! # . $ % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO.1026/MDS./2014 / ASSESSMENT YEAR : 2009-10 M/S.LASON INDIA PVT. LTD., (NOW M/S.SOURCEHOV INDIA PVT. LTD.,) 8 TO 12 TH FLOORS,DOWLATH TOWERS, NEW NO.59,61 & 63,TAYLORS ROAD, KILPAUK, CHENNAI 600 010. VS. JOINT COMMISSIONER OF INCOME TAX, COMPANY RANGE-II, CHENNAI. [PAN AABCV 3563 H ] ( () / APPELLANT) ( *+() /RESPONDENT) / APPELLANT BY : MR.SAROJ KUMAR PARIDA,ADVOCATE /RESPONDENT BY : MR.MILIND MADHUKAR BHUSARI, JCIT,DR / DATE OF HEARING : 13 - 04 - 201 6 / DATE OF PRONOUNCEMENT : 27 - 05 - 2016 , / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ASSESSMENT ORDER PASSED U/S.143(3) READ WITH SECTION 144C(13) OF THE ACT DATED ITA NO.1026/MDS./2014 :- 2 -: 25.02.2014 WHICH IN TURN EMANATED FROM THE DIRECTIO N OF DISPUTE RESOLUTION PANEL,(DRP),CHENNAI DATED 20.12.2013 PER TAINING TO ASSESSMENT YEAR 2009-10. 2. THE FIRST GROUND RAISED BY THE ASSESSEE IS THAT THE TPO ERRED IN REJECTING THE ASSESSEES TRANSFER PRICING(TP) STUDY AND MAKING AN ADJUSTMENT OF ` 21,60,43,705/-. THIS GROUND IS TOO GENERAL AND DOE S NOT REQUIRE ADJUDICATION. HENCE, THIS GROUND IS RE JECTED. 3. GROUND NO.2.2 READS AS FOLLOWS:- THE TPO /DRP OUGHT TO HAVE APPRECIATED THAT TH E PASS THROUGH COST OR THE DATA CONVERSION CHARGES REPRESENTED TH E PORTION OF THE DATA ENTRY WHICH WAS OUTSOURCED TO THE SUBSIDIARY A ND OTHER INDEPENDENT UNITS AND CANNOT BE INCLUDED IN THE OPE RATING INCOME AND EXPENDITURE OF THE ASSESSEE. 3.1 THE FACTS OF THE CASE ARE THAT THE ASSESSEE I S A WHOLLY OWNED SUBSIDIARY OF LASON SYSTEM INC. USA WHICH IS IN TU RN HELD BY LASON INC., MICHIGAN USA. THE ASSESSEE IS ENGAGED IN REN DERING DATA CONVERSION SERVICES TO ITS ULTIMATE PARENT COMPANY LASON INC., MICHIGAN USA IN THE AREA OF FORMS PROCESSING, E-PUB LISHING AND SUPPORT SYSTEMS AND SOFTWARE SERVICES. THE ASSESSEE COMPANY HAD E- ITA NO.1026/MDS./2014 :- 3 -: FILED ITS RETURN OF INCOME DECLARING NIL INCOME O N 29.09.2009. THE RETURN OF INCOME WAS PROCESSED U/S.143(1) OF THE AC T ON 22.11.2011 AND A REFUND OF ` 1,29,88,760/- WAS ISSUED. THE CASE WAS SELECTED FO R SCRUTINY AND NOTICE U/S.143(2) WAS ISSUED TO THE AS SESSEE ON 20.08.2010. SUBSEQUENTLY, THE CASE WAS ASSIGNED BY CIT,CHENNAI-1 TO THE ADDITIONAL CIT, COMPANY RANGE-II CHENNAI FOR CO MPLETION OF ASSESSMENT VIDE ORDER DATED 27.04.2012. A NOTICE U/ S.143(2) R.W.S.129 OF THE ACT WAS ISSUED ON 12.06.2012. NOTICE U/S.142 (1) DATED 12.06.2012 ALONG WITH QUESTIONNAIRE CALLING FOR DET AILS ON VARIOUS POINTS, WAS ALSO ISSUED. THE CASE WAS REFERRED TO THE TPO FOR COMPUTATION OF ALP AS THE ASSESSEE HAS MADE INTERNA TIONAL TRANSACTIONS EXCEEDING ` 15 CRORES. THEREAFTER THE TPO PASSED AN ORDER U/S.92CA OF THE ACT DATED 31.12.2012, MAKING AN UPW ARD ADJUSTMENT OF ` 21,60,43,705/-. THE ADDITIONAL CIT, COMPANY RANGE-I I ISSUED DRAFT ASSESSMENT ORDER U/S.143(3) R.W.S.144C ON 25.03.20 13, INCORPORATING THE ADJUSTMENT SUGGESTED BY THE TPO, BESIDES MAKING ADDITION TOWARDS PROVISION MADE FOR LOSS ON DERIVATIVE CONTR ACTS. AGGRIEVED, THE ASSESSEE PREFERRED DIRECTION FROM THE DRP. THE DRP PASSED DIRECTION U/S.144C(5) R.W.S 144C(D 20.12.2013 DIREC TING THE TPO TO EXCLUDE THE FOREIGN EXCHANGE GAIN AS WELL LOSS FROM THE FINANCIALS OF THE ASSESSEE COMPANY AND REWORK THE ALP ACCORDINGLY . THE DRP ALSO DIRECTED THE AO TO ALLOW THE PROVISION MADE FOR LOS S ON DERIVATIVE ITA NO.1026/MDS./2014 :- 4 -: CONTRACTS AS AN EXPENDITURE AFTER EXAMINING THE CON SISTENCY OF METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE IN PRECEDING OR FOLLOWING YEARS. 3.2 LD.A.R SUBMITTED THAT THE ASSESSEE OUTSOURCES T HE WORK TO ITS INDIAN ASSOCIATE VETRI SOFTWARE INDIA PVT. LTD AND TO MANY OTHER INDEPENDENT UNITS THAT CARRY OUT THE DATA ENTRY WOR K ON A CONTINUOUS BASIS. THE ENTIRE OUTSOURCED WORK IS CLASSIFIED UN DER DATA CONVERSON CHARGES IN THE P&L A/C AMOUNTING TO ` 29,84,16,215/- ,WHICH ALSO INCLUDE THE AMOUNT PAID TO ITS WHOLLY O WNED SUBSIDIARY VETRI SOFTWARE OF ` 8,55,83,359/- DURING THE A.Y 2009-10. THIS WORK IS MERELY ON OUTSOURCED JOB-WORK HAVING NO NEXUS WITH THE ACTUAL OPERATING INCOME AND EXPENSES OF THE ASSESSEE. IT SHOULD THEREFORE, BE EXCLUDED FROM BOTH THE INCOME AND EXPENDITURE OF THE ASSESSEE WHILE COMPUTING THE PLI. THE TPO OBSERVED IN THE T P ORDER THAT THE ASSESSEE HAS RENDERED ITES TO ITS A.E. DURING THE COURSE OF PROCEEDINGS, THE ASSESSEE HAS SUBMITTED SAMPLE COPY OF PURCHASE ORDER WITH ITS AE. IT SHOWS THAT THE A.E. REIMBURS ES THE A.E. ON COST PLUS 7% MARK UP. FURTHER, THE ASSESSEE ITSELF HAS STATED THAT IT HAS CHARGED MARK UP @ 7% ON COST IN RESPECT OF PASS THR OUGH COST ALSO. THE ASSESSEE HAS INCLUDED PASS THROUGH COST IN ITS PROFIT AND LOSS ACCOUNT. THEREFORE, TPO REJECTED THE CONTENTION OF THE ASSESSEE. ITA NO.1026/MDS./2014 :- 5 -: 3.3 DRP OBSERVED THAT IF THE ASSESSEE HAS INCLUDED PASS THROUGH COST IN ITS P&L A/C AND CHARGED MARKUP ON IT ALSO THEN T HIS PANEL FINDS THAT THERE IS NO SCOPE FOR RAISING ANY OBJECTION AGAINST IT BY THE ASSESSEE. FURTHER, DRP S OF THE VIEW THAT OUTSOURCED WORK BY THE ASSESSEE TO ITS SUBSIDIARY AND OTHER INDEPENDENT UNITS CANNOT BE CO NSIDERED A PASS THROUGH COST. IT IS THE DECISION OF THE ASSESSEE A S TO HOW THE WORK ORDERS RECEIVED FROM THE A.ES ARE EXECUTED. A PART OF THE WORK HAS NOT BEEN OUTSOURCED TO SUBSIDIARY AND OTHER INDEPENDENT UNITS BY THE ASSESSEE ON THE DIRECTIONS OF THE A.ES. IT IS THE DISCRETION OF THE ASSESSEE AS TO HOW THE WORK IS CARRIED OUT. THE ASSESSEE HAS RAISED TH E BILLS UPON AES AND RECEIVED THE PAYMENTS FROM ITS A.ES. FOR THE WORK GOT DONE BY THE ASSESSEE FROM ITS SUBSIDIARY AND OTHER INDEPENDENT UNITS THE BILLS HAVE BEEN RAISED BY THESE ENTITIES ON THE ASSESSEE AND THE ASSESSEE HAS MADE THE PAYMENT TO THEM ON ITS OWN ACCOUNT AND NOT ON BEHALF OF THE A. ES. THEREFORE, THE PAYMENTS TO THE SUBSIDIARY AND OTHER INDEPENDENT UN ITS BY THE ASSESSEE CANNOT BE CATEGORIZED AS PASS THROUGH COST AS IT IS NOT A PAYMENT FROM A.ES TO THE SUBSIDIARY OF THE ASSESSEE AND ASSESSEE ACTI NG MERELY AS A CONDUIT. HENCE, IT IS NOT A PASS THROUGH COST AND THEREFORE TPO RIGHTLY INCLUDED ON DEBIT AS WELL AS CREDIT SIDE IN THE FINANCIALS OF T HE ASSESSEE TO DETERMINE ITS PROFIT MARGIN. THIS PANEL THEREFORE UPHELD THE ACTI ON OF THE TPO. ITA NO.1026/MDS./2014 :- 6 -: 3.4 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE CONTENTION OF THE LD.A.R IS THAT THE AS SESSEE IS RECEIVING ONLY FIXED PERCENTAGE OF MARK UP ON PASS THROUGH CO ST AND PASS THROUGH COST CANNOT BE CONSIDERED FOR ARRIVING AT O PERATIVE PROFIT OR OPERATING PROFIT MARGIN OF THE ASSESSEE. FOR THIS PURPOSE, HE RELIED ON THE ORDER OF THE TRIBUNAL IN THE CASE OF DCIT VS. M /S.CHEIL COMMUNICATIONS INDIA (P) LTD., REPORTED IN [2011] 1 37 TTJ 539 (DELHI TRIBUNAL) WHEREIN HELD THAT:- 40. THE RIVAL CONTENTIONS OF BOTH THE PARTIES HAVE BEEN CONSIDERED AND ORDERS OF THE AUTHORITIES BELOW HAVE CAREFULLY BEEN PERUSED. THE ONLY QUESTION THAT FALLS FOR OUR CONSIDERATION IS WITH REGARD TO THE METHOD OF COMPUTING PROFIT/TC MA RGIN WHETHER ON GROSS BASIS AS DONE BY THE TPO OR NET BASIS AS W ORKED OUT BY THE ASSESSEE. IN THIS CASE THE ASSESSEE HAS APPLIED TNM METHOD TO DETERMINE ALP, WHICH HAS ALSO BEEN ACCEPTED BY T HE REVENUE AUTHORITIES. THE COMPARABLES CITED BY THE ASSESSEE HAS ALSO BEEN ACCEPTED BY THE TPO AS APPROPRIATE. IT IS ALSO FOUN D BY US THAT IN THE REGULAR FINANCIAL ACCOUNTS MAINTAINED BY THE CO MPARABLE COMPANIES, THE COMPARABLES RECOGNIZE REVENUE ON A N ET BASIS. THE ASSESSEE HAS ALSO RECOGNIZED REVENUES ON A NET BASIS IN ITS FINANCIAL ACCOUNT, WHICH HAD BEEN DULY AUDITED BY T HE AUDITOR. THE ASSESSEE HAS COMPUTED THE MARGIN OF OPERATIVE P ROFIT ON THE TOTAL COST ON THE BASIS OF NET REVENUE BY WAY OF MA RK-UP RECEIVED FROM THE ASSOCIATE CONCERN. THE PAYMENT MADE BY THE ASSESSEE TO THIRD PARTY VENDOR/MEDIA AGENCIES FOR AND ON BEH ALF OF THE PRINCIPAL HAS NOT BEEN INCLUDED IN THE TOTAL COST F OR DETERMINING THE PROFIT MARGIN, THOUGH, ON THE OTHER HAND, THE T PO HAS INCLUDED THE PAYMENT REIMBURSED BY THE ASSESSEE'S A SSOCIATE ITA NO.1026/MDS./2014 :- 7 -: ENTERPRISE TO THE ASSESSEE ON ACCOUNT OF PAYMENT MA DE TO THIRD PARTY VENDOR/MEDIA AGENCIES. IT IS NOT IN DISPUTE T HAT THE ASSESSEE IS ENGAGED IN UNDERTAKING ADVERTISING SERV ICES FOR ITS CUSTOMERS/AES IN THE CAPACITY OF AN AGENT. AS PART OF ITS BUSINESS OPERATION, THE ASSESSEE FACILITATES PLACEMENT OF AD VERTISEMENT FOR ITS AE IN THE PRINT/ELECTRONIC ETC. MEDIA AND FOR T HAT PURPOSE, THE ASSESSEE IS REQUIRED TO MAKE PAYMENT TO THIRD PARTI ES FOR RENDERING OF ADVERTISEMENT SPACE ON BEHALF OF ITS C USTOMERS OR AES. IT IS, THUS, CLEAR THAT THE ASSESSEE'S BUSINES S IS NOT SALE OF ADVERTISING SLOTS TO ITS CUSTOMERS OR ASSOCIATE CON CERN. FOR PERFORMING THE FUNCTIONS FOR AND ON BEHALF OF AES, THE ASSESSEE IS REMUNERATED BY ITS AES ON THE BASIS OF A FIXED COMMISSION/CHARGES BASED ON EXPENSES OR COST INCURR ED BY THE ASSESSEE FOR RELEASE OF A PARTICULAR ADVERTISEMENT. IT IS ALSO TO BE NOTED THAT ADVERTISING SPACE (BE IT MEDIA, PRINT OR OUTDOOR), HAS BEEN LET OUT BY THIRD PARTY VENDORS IN THE NAME OF ULTIMATE CUSTOMERS AND BENEFICIARY OF ADVERTISEMENT. WE HAVE GONE THROUGH THE INVOICES AND PURCHASE ORDERS FROM THIRD PARTY VENDORS AND FIND THAT THEY CONTAIN CUSTOMERS' NAME, AND ALL THE TERMS OF ADVERTISEMENT ARE FINALIZED AFTER TAKING T HE APPROVAL FROM THE CUSTOMERS. THE ASSESSEE SIMPLY ACTS AS AN INTERMEDIARY BETWEEN THE ULTIMATE CUSTOMER AND THE THIRD PARTY V ENDOR IN ORDER TO FACILITATE PLACEMENT OF THE ADVERTISEMENT. THE PAYMENT MADE BY THE ASSESSEE TO VENDORS IS RECOVERED FROM T HE RESPECTIVE CUSTOMERS OR AES. IN THE EVENT CUSTOMER FAILS TO PA Y ANY SUCH AMOUNT TO THE ADVERTISEMENT AGENCY, THE BAD DEBT RI SK IS BORNE BY THE THIRD PARTY VENDOR AND NOT BY THE ADVERTISIN G AGENCY I.E. THE ASSESSEE. IT IS, THUS, CLEAR THAT THE ASSESSEE HAS NOT ASSUMED ANY RISK ON ACCOUNT OF NON-PAYMENT BY ITS CUSTOMERS OR AES. AT THIS STAGE A USEFUL REFERENCE MAY BE MADE TO ITS 20 09 TRANSFER PRICING GUIDELINES ACCEPTED BY THE OECD WHERE IT IS LAID DOWN THAT WHEN AN AE IS ACTING ONLY AS AN AGENT OR INTER MEDIARY IN THE ITA NO.1026/MDS./2014 :- 8 -: PROVISION OF SERVICE, IT IS IMPORTANT IN APPLYING T HE COST PLUS METHOD THAT THE RETURN OR MARK-UP IS APPROPRIATE FO R THE PERFORMANCE OF AN AGENCY FUNCTION RATHER THAN FOR T HE PERFORMANCE OF THE SERVICES THEMSELVES, AND, IN SUC H A CASE, IT MAY NOT BE APPROPRIATE TO DETERMINE ALP AS A MARK-U P ON THE COST OF SERVICES BUT RATHER ON THE COST OF AGENCY F UNCTION ITSELF, OR ALTERNATIVELY, DEPENDING ON THE TYPE OF COMPARABLE DATA BEING USED, THE MARK-UP ON THE COST OF SERVICES SHOULD BE LOWER THAN WOULD BE APPROPRIATE FOR THE PERFORMANCE OF THE SER VICES THEMSELVES. IN THIS TYPE OF CASE, IT WILL BE APPROP RIATE TO PASS ON THE COST OF RENDERING ADVERTISING SPACE, TO THE CRE DIT RECIPIENT WITHOUT A MARK-UP AND TO APPLY A MARK-UP ONLY TO TH E COSTS INCURRED BY THE INTERMEDIARY IN PERFORMING ITS AGEN CY FUNCTION. THESE GUIDELINES ARE AS UNDER : '3.41 IN APPLYING THE TRANSACTIONAL NET MARGIN METH OD, VARIOUS CONSIDERATIONS SHOULD INFLUENCE THE CHOICE OF MARGIN USED FOR EXAMPLE, THESE CONSIDERATIONS WOULD INCLUD E HOW WELL THE VALUE OF ASSETS EMPLOYED IN THE CALCULATIO NS IS MEASURED (E.G. TO THAT EXTENT THERE IS INTANGIBLE P ROPERTY THE VALUE OF WHICH IS NOT CAPTURED ON THE BOOKS OF THE ENTERPRISE) AND THE FACTORS AFFECTING WHETHER SPECIFIC COSTS SH OULD BE PASSED THROUGH, MARKED-UP, OR EXCLUDED ENTIRELY FRO M THE CALCULATION.' - - - - - 42. FURTHER, OECD IN ITS 2009 TRANSFER PRICING GUID ELINES HAS LAID DOWN AS UNDER : '7.36 WHEN AN AE IS ACTING ONLY AS AN AGENT OR INTERMEDIARY IN THE PROVISION OF SERVICES, IT IS IM PORTANT IN APPLYING THE COST PLUS METHOD THAT THE RETURN OR MARK-UP IS APPROPRIATE FOR THE PERFORMANCE OF AN AGENCY FUNCTION RATHER THAN FOR THE PERFORMANCE OF THE SERVICES THEMSELVES. IN SUCH A CASE, IT MAY NOT BE ITA NO.1026/MDS./2014 :- 9 -: APPROPRIATE TO DETERMINE ARM'S LENGTH PRICING AS A MARK- UP ON THE COST OF THE SERVICES BUT RATHER ON THE CO STS OF THE AGENCY FUNCTION ITSELF OR ALTERNATIVELY, DEPEND ING ON THE TYPE OF COMPARABLE DATA BEING USED, THE MARK-UP ON THE COST OF SERVICES SHOULD BE LOWER THAN WOULD BE APPROPRIATE FOR THE PERFORMANCE OF THE SERVICES THEMSELVES. FOR EXAMPLE, AN AE MAY INCUR THE COSTS OF RENDING ADVERTISING SPACE ON BEHALF OF GROUP MEMBER S, COSTS THAT THE GROUP MEMBERS WOULD HAVE INCURRED DIRECTLY HAD THEY BEEN INDEPENDENT. IN SUCH A CASE, IT MAY WELL BE APPROPRIATE TO PASS ON THESE COSTS TO T HE GROUP RECIPIENTS WITHOUT A MARK-UP, AND TO APPLY A MARK-UP ONLY TO THE COSTS INCURRED BY THE INTERMEDI ARY IN PERFORMING ITS AGENCY FUNCTION.' HOWEVER, WE FIND THAT IT IS AN ADMITTED FACT THAT T HE ASSESSEE ITSELF INCLUDED THE PASS THROUGH COST IN ITS PROFIT AND LO SS ACCOUNT. IT IS NOT THE CASE OF ASSESSEE THAT IT IS CHARGED ONLY MARK U P RECEIVABLE FROM A.E IN ITS P&L A/C. IT IS ALSO ADMITTED FACT THAT ASSESSEE RAISED BILLS UPON ITS A.E AS PAYMENT FROM ITS A.E AND RECEIVED T HE PAYMENTS FROM ITS A.ES. IT IS ALSO BROUGHT ON RECORD THAT FOR TH E WORK GOT DONE BY THE ASSESSEE FROM ITS SUBSIDIARY AND OTHER INDEPENDENT UNITS, THE BILLS HAVE BEEN RAISED BY THESE ENTITIES ON THE ASSESSEE AND THE ASSESSEE HAS MADE THE PAYMENTS TO THEM ON ITS OWN ACCOUNTS A ND NOT ON BEHALF OF THE A.ES. THUS, THE PAYMENTS TO THE SUBS IDIARY AND OTHER INDEPENDENT UNITS BY THE ASSESSEE CANNOT BE TREATED AS PASS THROUGH COST AS IT IS NOT THE PAYMENT FROM A.E TO SUBSIDIAR Y OF THE ASSESSEE. ITA NO.1026/MDS./2014 :- 10 - : BEING SO, THE AO IS JUSTIFIED IN CONSIDERING THE PA SS THROUGH COST ALSO FOR ARRIVING AT THE OPERATIVE COST/OPERATING COST A ND THE DECISION RELIED UPON BY THE LD.A.R CITED ABOVE HAVE NO APPLICATION. HENCE, THIS GROUND OF ASSESSEE IS DISMISSED. 4.1 THE NEXT GROUND IN THIS APPEAL IS THAT THE TPO/ DRP GROSSLY ERRED IN CHOOSING COMPARABLES (I) COSMIC GLOBAL, II) E4E HEALTH CARE BUSINESS SERVICES LTD., III) ACCENTIA IV)MICROGENET ICS AND V) ALLSEC TECHNOLOGIES LTD.), WHICH ARE FUNCTIONALLY DIFFEREN T OR HAVING OCCURRENCE OF EXTRA-ORDINARY EVENTS. 4.1.1 REGARDING COSMIC GLOBAL LTD.,, LD.A.R SUBM ITTED THAT THIS COMPANY IS ENGAGED IN TRANSLATION, AUDIT AND MEDICA L TRANSCRIPTION BUSINESS. AS AGAINST IT, THE ASSESSEE IS ENGAGED I N DATA PROCESSING SERVICE. THE ASSESSEE COMPANY HAS DEVELOPED A WEB P ORTAL INCURRING EXPENDITURE IN EARLIER YEARS FOR THE DEVELOPMENT, L AUNCH, AND SUSTAIN MAINTENANCE AND UP-GRADATION OF THE PORTAL BUT DURI NG THE PERIOD NO INCOME IS GENERATED FROM IT. LD.A.R FURTHER SUBMIT TED THAT COSMIC GLOBAL LTD., IS INTO DEVELOPMENT OF INTANGIBLE ASSE T FOR ITS FUTURE BENEFIT WHEREAS THE ASSESSEE DOES NOT DEVELOP ANY S UCH INTANGIBLE ASSET. THE LD.A.R ALSO SUBMITTED THAT THERE IS A H IGHER LEVEL OF SKILL REQUIRED IN EMPLOYEES OF COSMOS GLOBAL LTD AS COMPA RED TO THE ITA NO.1026/MDS./2014 :- 11 - : ASSESSEE. FURTHER, HE RELIED ON THE JUDGMENT OF D ELHI HIGH COURT IN THE CASE OF RAMPGREEN SOLUTIONS PVT LTD. VS. CIT IN ITA NO.102 /2015 VIDE ORDER DATED 10.08.2015 SPECIFICALLY FOLLOWING: - 31. 1N THE PRESENT CASE, THE TRIBUNAL NOTED THAT VI SHAL AND ECLERX WERE BOTH ENGAGED IN RENDERING ITES. TH TTILUNA1 HE LD THAT, ONCE A SERVICE FALLS UNDER THE CATEGORY OF ITES, THEN TH ERE IS SUB- CLASSIFICATION OF SEGMENT THUS, ACCORDING TO TRIBU NAL, NO DIFFERENTIATION COULD BE MADE BETWEEN THE ENTRIES R ENDERING ITES. WE FIND IT DIFFICULT TO ACCEPT THIS VIEW AS IT IS C ONTRARY TO THE FUNDAMENTAL RATIONAL OF DETERMINING ALP BY COMPARIN G CONTROLLED TRANSACTIONS/ENTITIES WITH SIMILAR UNCONTROLLED TRA NSACTIONS/ENTITIES. ITES ENCOMPASSES A WIDE SPECTRUM OF SERVICES THAT U SE INFORMATION TECHNOLOGY BASED DELIVERY. SUCH SERVICE S COULD INCLUDE RENDERING HIGHLY TECHNICAL SERVICES BY QUAL IFIED TECHNICAL PERSONNEL, INVOLVING ADVANCED SKILLS AND KNOWLEDGE, SUCH AS ENGINEERING, DESIGN AND SUPPORT. WHILE, ON THE OTHE R END OF THE SPECTRUM ITES WOULD ALSO INCLUDE VOICE-BASED CALL C ENTERS THAT RENDER ROUTINE CUSTOMER SUPPORT FOR THEIR CLIENTS. CLEARLY, CHARACTERISTICS OF THE SERVICE RENDERED WOULD BE DI SSIMILAR. FURTHER, BOTH SERVICE PROVIDERS CANNOT BE CONSIDERE D TO BE FUNCTIONALLY SIMILAR. THEIR BUSINESS ENVIRONMENT WO ULD HE ENTIRELY DIFFERENT, THE DEMAND AND SUPPLY FOR THE SERVICES W OULD HE DIFFERENT, THE ASSETS AND CAPITAL EMPLOYED WOULD DI FFER, THE COMPETENCE REQUIRED TO OPERATE THE TWO SERVICES WOU LD BE DIFFERENT. EACH OF THE AFORESAID FACTORS WOULD HAVE A MATERIAL BEARING ON THE PROFITABILITY OF THE TWO ENTITIES. T REATING THE SAID ENTITIES TO BE COMPARABLES ONLY FOR THE REASON THAT THEY USE INFORMATION TECHNOLOGY FOR THE DELIVERY OF THEIR SE RVICES, WOULD, IN OUR OPINION, BE ERRONEOUS. ITA NO.1026/MDS./2014 :- 12 - : 32. IT HAS BEEN POINTED OUT THAT WHILST THE TRIBUNA L IN WILLIS PROCESSING SERVICES (INDIA,) PVT. LTD. V. DCIT (SUP RA) HELD THAT NO DISTINCTION COULD BE MADE BETWEEN KPO AND BPO SERVI CE PROVIDERS, HOWEVER, A CONTRARY VIEW HAD BEEN TAKEN BY SEVERAL BENCHES OF THE TRIBUNAL IN OTHER CASES. IN CAPITAL IQ INFORMATION SYSTEM INDIA (F,) LTD. V. DY. CIT, (IT) [2013] 32 T AXMANN.COM 21 AND LLOYDS TSB GLOBAL SERVICES PVT. LTD. V. DCIT, ( ITA NO. 5928/MUM/2012 DATED 2LTH NOVEMBER 2012), THE HYDERA BAD AND MUMBAI BENCH OF THE TRIBUNAL RESPECTIVELY ACCEPTED THE VIEW THAT A BPO SERVICE PROVIDER COULD NOT BE COMPARED WITH A KPO SERVICE PROVIDER. 33. THE SPECIAL BENCH OF THE TRIBUNAL IN MAERSK GLO BAL CENTERS (INDIA) PVT. LTD. (SUPRA) STRUCK A DIFFERENT CORD. THE SPECIAL BENCH OF THE TRIBUNAL HELD THAT EVEN THOUGH THERE APPEARS TO BE A DIFFERENCE BETWEEN BPO AND KPO SERVICES, THE LINE O F DIFFERENCE IS VERY THIN. THE TRIBUNAL WAS OF THE VIEW THAT THERE COULD BE A SIGNIFICANT OVERLAP IN THEIR ACTIVITIES AND IT MAY BE DIFFICULT TO CLASSIFY SERVICES STRICTLY AS FALLING UNDER THE CAT EGORY OF EITHER A BPO OR A KPO. THE TRIBUNAL ALSO OBSERVED THAT ONE O F THE KEY SUCCESS FACTORS OF THE BPO INDUSTRY IS ITS ABILITY TO MOVE UP THE VALUE CHAIN THROUGH KPO SERVICE OFFERING. FOR THE A FORESAID REASONS, THE SPECIAL BENCH OF THE TRIBUNAL HELD THA T ITES SERVICES COULD NOT HE BIFURCATED AS BPO AND KPO SERVICES FOR THE PURPOSE OF COMPARABILITY ANALYSIS IN THE FIRST INSTANCE. TH E TRIBUNAL PROCEEDED TO HOLD THAT A RELATIVELY EQUAL DEGREE OF COMPARABILITY CAN BE ACHIEVED BY SELECTING POTENTIAL COMPARABLES ON A BROAD FUNCTIONAL ANALYSIS AT ITES LEVEL AND THAT THE COMP ARABLES SO SELECTED COULD BE PUT TO FURTHER TEST BY COMPARING SPECIFIC FUNCTIONS PERFORMED IN THE INTERNATIONAL TRANSACTIO NS WITH UNCONTROLLED TRANSACTIONS TO ATTAIN RELATIVELY EQUA L DEGREE OF COMPARABILITY. ITA NO.1026/MDS./2014 :- 13 - : 34. WE HAVE RESERVATIONS AS TO THE TRIBUNALS AFORE SAID VIEW IN MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. (SUPRA). AS INDICATED ABOVE, THE EXPRESSION BPO AND KPO ARE, PLAINLY, UNDERSTOOD IN THE SENSE THAT WHEREAS, BPO DOES NOT NECESSARILY IN VOLVE ADVANCED SKILLS AND KNOWLEDGE; KPO, ON THE OTHER HA ND, WOULD INVOLVE EMPLOYMENT OF ADVANCED SKILLS AND KNOWLEDGE FOR PROVIDING SERVICES. THUS, THE EXPRESSION KPO IN COM MON PARLANCE IS USED TO INDICATE AN ITES PROVIDER PROVIDIN.G A C OMPLETELY DIFFERENT NATURE OF SERVICE THAN ANY OTHER BPO SERV ICE PROVIDER. A KPO SERVICE PROVIDER WOULD ALSO BE FUNCTIONALLY DIF FERENT FROM OTHER BPO SERVICE PROVIDERS, INASMUCH AS THE RESPON SIBILITIES UNDERTAKEN THE ACTIVITIES PERFORMED, THE QUALITY OF RESOURCES EMPLOYED WOULD BE MATERIALLY DIFFERENT. IN THE CIRC UMSTANCES, WE ARE UNABLE TO AGREE THAT BROADLY ITES SECTOR CAN BE USED FOR SELECTING COMPARABLES WITHOUT MAKING A CONSCIOUS SE LECTION AS TO THE QUALITY AND NATURE OF THE CONTENT OF SERVICES. RULE 10B(2)(A) OF THE INCOME TAX RULES, 1962 MANDATES THAT THE COMPAR ABILITY OF CONTROLLED AND UNCONTROLLED TRANSACTIONS BE JUDGED WITH REFERENCE TO SERVICE/PRODUCT CHARACTERISTICS. THIS FACTOR CAN NOT BE UNDERMINED BY USING A BROAD CLASSIFICATION OF ITES WHICH TAKES WITHIN ITS FOLD VARIOUS TYPES OF SERVICES WITH COMP LETELY DIFFERENT CONTENT AND VALUE. THUS, WHERE THE TESTED PARTY IS NOT A KPO SERVICE PROVIDER, AN ENTITY RENDERING KPO SERVICES CANNOT BE CONSIDERED AS A COMPARABLE FOR THE PURPOSES OF TRAN SFER PRICING ANALYSIS. THE PERCEPTION THAT A BPO SERVICE PROVIDE R MAY HAVE THE ABILITY TO MOVE UP THE VALUE CHAIN BY OFFERING KPO SERVICES CANNOT HE A GROUND FOR ASSESSING THE TRANSACTIONS RELATING TO SERVICES RENDERED BY THE BPO SERVICE PROVIDER BY BENCHMARKIN G IT WITH THE TRANSACTIONS OF KPO SERVICES PROVIDERS. THE OBJECT IS TO ASCERTAIN THE ALP OF THE SERVICE RENDERED AND NOT OF A SERVIC E (HIGHER IN VALUE CHAIN) THAT MAY POSSIBLY BE RENDERED SUBSEQUE NTLY. ITA NO.1026/MDS./2014 :- 14 - : 35. AS POINTED OUT BY THE SPECIAL BENCH OF THE TRIB UNAL IN MAERSK GLOBAL CENTERS INDIA) PVT. LTD. (SUPRA), THERE MAY BE CASES WHERE AN ENTITY MAY BE RENDERING A MIX OF SERVICES SOME O F WHICH MAY BE FUNCTIONALLY COMPARABLE TO A KPO WHILE OTHER SER VICES MAY NOT. IN SUCH CASES A CLASSIFICATION OF BPO AND KPO MAY N OT BE FEASIBLE. CLEARLY, NO STRAITJACKET FORMULA CAN BE APPLIED. IN CASES WHERE THE CATEGORIZATION OF SERVICES RENDERED CANNOT BE DEFIN ED WITH CERTAINTY, IT WOULD BE APPOSITE TO EMPLOY THE BROAD FUNCTIONALITY TEST AND THEN EXCLUDE UNCONTROLLED ENTITIES, WHICH ARE FOUND TO BE MATERIALLY DISSIMILAR IN ASPECTS AND FEATURES THAT HAVE A BEARING ON THE PROFITABILITY OF THOSE ENTITIES. HOWEVER, WHERE THE CONTROLLED TRANSACTIONS ARE CLEARLY IN THE NATURE OF LOWER-END ITES SUCH AS CALL CENTERS ETC. FOR RENDERING DATA PROCESSING NOT INVOLVING DOMAIN KNOWLEDGE, INCLUSION OF ANY KP0 SERVICE PROV IDER AS A COMPARABLE WOULD NOT BE WARRANTED AND THE TRANSFER PRICING STUDY MUST TAKE THAT INTO ACCOUNT AT THE THRESHOLD. 36. AS POINTED OUT EARLIER, THE TRANSFER PRICING AN ALYSIS MUST SERVE THE BROAD OBJECT OF BENCHMARKING AN INTERNATIONAL T RANSACTION FOR DETERMINING AN ALP. THE METHODOLOGY NECESSITATES TH AT THE COMPARABLES MUST HE SIMILAR IN MATERIAL ASPECTS. TH E COMPARABILITY MUST BE JUDGED ON FACTORS SUCH AS PRO DUCT/SERVICE CHARACTERISTICS, FUNCTIONS UNDERTAKEN, ASSETS USED, RISKS ASSUMED. THIS IS ESSENTIAL TO ENSURE THE EFFICACY OF THE EXE RCISE. THERE IS SUFFICIENT FLEXIBILITY AVAILABLE WITHIN THE STATUTO RY FRAMEWORK TO ENSURE A FAIR ALP. 37. APPLYING THE AFORESAID PRINCIPLES TO THE FACTS OF THE PRESENT CASE, IT IS ONCE AGAIN CLEAR THAT BOTH VIS HAL AND ECLERX COULD NOT BE TAKEN AS COMPARABLES FOR DETERMINING T HE ALP. VISHAL AND ECLERX, BOTH ARE INTO KPO SERVICES. IN MAERSK G LOBAL CENTERS (INDIA) PVT. LTD. (SUPRA), THE SPECIAL BENCH OF THE TRIBUNAL HAD NOTED THAT ECLERX IS ENGAGED IN DATA ANALYTICS, DAT A PROCESSING SERVICES, PRICING ANALYTICS, BUNDLING OPTIMIZATION, CONTENT ITA NO.1026/MDS./2014 :- 15 - : OPERATION, SALES AND MARKETING SUPPORT, PRODUCT DAT A MANAGEMENT, REVENUE MANAGEMENT. IN ADDITION, ECLERX ALSO OFFERED FINANCIAL SERVICES SUCH AS REAL-TIME CAPITA L MARKETS, MIDDLE AND BACK-OFFICE SUPPORT, PORTFOLIO RISK MANAGEMENT SERVICES AND VARIOUS CRITICAL DATA MANAGEMENT SERVICES. CLEARLY, THE AFORESAID SERVICES ARE NOT COMPARABLE WITH THE SERVICES RENDE RED BY THE ASSESSEE. FURTHER, THE FUNCTIONS UNDERTAKEN (I.E. T HE ACTIVITIES PERFORMED ARE ALSO NOT COMPARABLE WITH THE ASSESSEE . IN OUR VIEW, THE TRIBUNAL ERRED IN HOLDING THAT THE FUNCTI ONS PERFORMED BY THE ASSESSEE WERE BROADLY SIMILAR TO THAT OF ECLERX OR VISHAL. THE OPERATING MARGIN OF ECLERX, THUS, COULD NOT BE INCL UDED TO ARRIVE AT AN ALP OF CONTROLLED TRANSACTIONS, WHICH WERE MATER IALLY DIFFERENT IN ITS CONTENT AND VALUE. IN MAERSK GLOBAL CENTERS (INDIA) PVT. LTD. (SUPRA), THE SPECIAL BENCH OF THE TRIBUNAL HAD NOTE D THE SAME AND HAD, THUS, EXCLUDED ECLERX AS A COMPARABLE. IT IS F URTHER OBSERVED THAT THE COMPARABILITY OF ECLERX HAD ALSO BEEN EXAM INED BY THE HYDERABAD BENCH OF THE TRIBUNAL IN M/S CAPITAL IQ I NFORMATION SYSTEMS (INDIA) (P.) LTD. V. ADDITIONAL COMMISSIONE R OF INCOME- TAX (SUPRA), WHEREIN, THE TRIBUNAL DIRECTED THE EXC LUSION OF ECLERX AS A COMPARABLE FOR THE REASON THAT IT WAS ENGAGED IN PROVIDING KPO SERVICES AND FURTHER THAT IT HAD ALSO RETURNED SUPERNORMAL PROFITS. 4.1.2 ON THE OTHER HAND, LD.D.R MADE HIS SUBMISSI ON THAT NEITHER RECEIPTS NOR EXPENDITURE HAVE INFLUENCED THE FINANC IALS OF COSMIC GLOBAL LTD. LD.D.R FURTHER POINTED OUT THAT THE DIF FERENCE BETWEEN THE ASSESSEE AND COSMOS GLOBAL LTD DO NOT VITIATE THE C OMPARABILITY AND HENCE NO INTERFERENCE IS CALLED FOR.. ITA NO.1026/MDS./2014 :- 16 - : 4.1.3 WE HAVE HEARD BOTH THE PARTIES AND PERUSED T HE MATERIAL ON RECORD. M/S.COSMIC GLOBAL LTD. IS MAINLY ENGAGED I N ITES AND IT QUALIFIED AS A COMPARABLE TO ASSESSEES CASE. AS OB SERVED BY DRP, NEITHER RECEIPTS NOR EXPENDITURE HAVE INFLUENCED TH E FINANCIALS OF COSMIC GLOBAL LTD., TO SHOW THAT IT IS NOT COMPARAB LE. SINCE THE ASSESSEE IS ENGAGED IN THE BUSINESS OF ITES, WE DO NOT FIND ANY REASON TO EXCLUDE M/S.COSMIC GLOBAL LTD. FROM THE C OMPARABLES. FURTHER, IT IS PERTINENT TO MENTION HEREIN THAT IN THE THE CASE OF BRIGADE GLOBAL SERVICES (P.) LTD. VS. ITO REPORTED IN [2013] 143 ITD 59 (ITAT[HYD]), THIS COMPANY HAS CONSIDERED AS COMPARABLE. BEING SO, WE REJECT THE GROUND TAKEN BY THE ASSESSE E ON THIS ISSUE. 4.2 REGARDING E4E-HEALTHCARE BUSINESS SERVICES LT D., THE LD.A.R SUBMITTED THAT M/S.E4E-HEALTHCARE BUSINESS SERVICES LTD., IS IN PROVIDING END TO END HEALTHCARE SERVICES WHICH ARE HIGHER VALUE ADDED SERVICES REQUIRING HIGH SKILLED EMPLOYEES AS AGAINS T SIMPLE DATA ENTRY SERVICE PROVIDED BY THE ASSESSEE. THE LD.A.R HAS AL SO SUBMITTED THAT E4E-HEALTHCARE BUSINESS SERVICES LTD., HAS NOT INCU RRED ANY EMPLOYEE EXPENDITURE COST. FURTHER, THE LD.A.R SUBMITTED THA T E4E-HEALTHCARE BUSINESS SERVICES LTD., HAS ALSO ACQUIRED NITTANY O UTSOURCING LTD., IN 2006 IS CHANGED INTO E4E-HEALTHCARE BUSINESS SERVIC ES LTD EFFECTIVELY FROM JUNE 22, 2009. ITA NO.1026/MDS./2014 :- 17 - : 4.2.1 ON THE OTHER HAND, LD.D.R RELIED ON THE ORDER OF DRP. 4.2.2 WE HAVE HEARD BOTH THE PARTIES AND PERUSED T HE MATERIAL ON RECORD. THE ASSESSEES MAIN PLEA THAT E4E-HEALTHCA RE BUSINESS SERVICES LTD., IS PROVIDING END TO END HEALTHCARE S ERVICES WHICH ARE HIGHER VALUE ADDED SERVICES REQUIRING HIGH SKILLED EMPLOYEES AS AGAINST SIMPLE DATA ENTRY SERVICE PROVIDED BY THE ASSESSEE. HOWEVER, THE ASSESSEE HAS NOT PLACED ANY DETAILS OF THE EMPLOYEE S REGARDING THEIR QUALIFICATION OR SKILL. FURTHER, THE ACQUISITION O F M/S.NITTANCY OUTSOURCING LTD. BY M/S.E4E-HEALTHCARE BUSINESS SE RVICES LTD., IN THE YEAR OF 2006, WHICH IS NO RELEVANCE TO THE ASSESSME NT YEAR 2009-10. BEING SO, THE M/S.E4E-HEALTHCARE BUSINESS SERVICES LTD., AND THE ASSESSEE BEING IN SIMILAR BUSINESS, WE DO NOT FIND ANY REASON TO E4E- HEALTHCARE BUSINESS SERVICES LTD. TO EXCLUDE AS COM PARABLE. THIS GROUND RAISED BY THE ASSESSEE IS REJECTED. 4.3 REGARDING ACCENTIA TECHNOLOGIES LTD., THE LD.A .R SUBMITTED THAT THE M/S.ACCENTIA TECHNOLOGIES LTD., IS FUNCTIONALLY DIFFERENT AS IT PROVIDES CONSULTING SERVICES, DEVELOPED A SOFTWARE PRODUCT CALLED INSTACKARE AND ALSO OFFERS SOFTWARE AS A SERVICE WH ICH WAS BASED ON THE WORKFLOW INTERNALLY DEVELOPED. M/S.ACCENTIA TE CHNOLOGIES LTD., HAS BEEN ACQUIRING VARIOUS ITES COMPANIES FOR SEVER AL YEARS NOW. HE FURTHER SUBMITTED THAT FOR THE RELEVANT ASSESSMENT YEAR 2009-10 ALSO, ITA NO.1026/MDS./2014 :- 18 - : THE COMPANY HAS ACQUIRED M/S.OAK TECHNOLOGIES INC. LD.A.R SUBMITTED THAT SIMILAR TO OTHER COMPARABLES THE SKILL-SET REQ UIRED BY THE ASSESSEE COMPANY. 4.3.2 ON THE OTHER HAND, LD.D.R RELIED ON THE ORDE R OF DRP. 4.3.3 WE HAVE HEARD BOTH THE PARTIES AND PERUSED T HE MATERIAL ON RECORD. AS SEEN FROM THE RECORDS, M/S.ACCENTIA TEC HNOLOGIES LTD., ACQUIRED VARIOUS COMPANIES FROM YEAR BY YEAR. MORE SO, IN THE ASSESSMENT YEAR UNDER CONSIDERATION I.E. 2009-10, T HE ASSESSEE HAS ACQUIRED M/S.OAK TECHNOLOGIES INC. BEING SO, AS HE LD BY CO-ORDINATE BENCH OF HYDERABAD IN THE CASES OF ZAVATA INDIA P. LTD. VS. DCIT REPORTED IN [2013] 25 ITR (TRIB) 504 (ITAT[HYD]) AN D ALSO BY CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD., VS. DCIT( INT. TAXATION) REPORTED IN 25 ITR (TRIB) 185 (ITAT[HYD]) THAT THER E IS AN EXTRA- ORDINARY EVENT LIKE MERGER/DE-MERGER WHICH WILL AFF ECT PROFITABILITY OF THE COMPANY IN THE FINANCIAL YEAR WHEN SUCH EVENTS TOOK PLACE AND IT CANNOT BE COMPARABLE WITH ASSESSEE. ACCORDINGLY, T HIS GROUND OF ASSESSEE IS ALLOWED AND M/S.ACCENTIA TECHNOLOGIES L TD., IS TO BE EXCLUDED FROM COMPARABLES. 4.5 REGARDING M/S.MICRO GENETICS SERVICES LTD., THE LD.A.R SUBMITTED THAT M/S.MICRO GENETICS SERVICES LTD., I S INTO PROVIDING MEDICAL TRANSCRIPTION SERVICES WHICH ARE MUCH HIGHE R IN THE VALUE ITA NO.1026/MDS./2014 :- 19 - : ADDED SERVICE CHAIN AS AGAINST SIMPLE DATA ENTRY SE RVICE PROVIDED BY THE ASSESSEE. 4.5.1 ON THE OTHER HAND, LD.D.R RELIED ON THE ORD ER OF DRP. 4.5.2 AS DISCUSSED IN THE CASE OF E4E-HEALTHCARE B USINESS SERVICES LTD., IN EARLIER PARA 4.2.2, WE ARE OF THE OPINION THAT M/S.MICRO GENETICS SERVICES LTD., CANNOT BE REJECTED AS COMP ARABLE. THIS GROUND IS REJECTED. 4.6 REGARDING M/S.ALLSEC TECHNOLOGIES LTD., THE LD .A.R SUBMITTED THAT M/S.ALLSEC TECHNOLOGIES LTD., IS NOT A PERSIST ENT LOSS MAKING COMPANY AND LOSSES ARE ONLY DUE TO THE ECONOMIC DOW N TURN IN THE INTERNATIONAL MARKET WHICH HAS AFFECTED THE PROCURE MENT OF NEW BUSINESS. WITH REGARD TO ACQUISITION OF M/S.INDIAN DOMESTIC CONTRACT MANAGEMENT SERVICES DIVISION OF I2I TELESOURCE PVT. LTD., THE LD.A.R SUBMITTED THAT THE TOTAL VALUE OF ACQUISITION IS ON LY 4.76 CRORES WHICH IS LESS THAN 5% OF THE TOTAL TURNOVER OF THE COMPANY. LD.A.R SUBMITTED THAT IT SHOULD NOT HAVE BEEN REJECTED AS COMPARABLE S. 4.6.1 ON THE OTHER HAND, LD.D.R SUBMITTED THAT TH E TPO HAD APPLIED DIMINISHING REVENUE /PERSISTENT LOSSES INCLUDING TH E F.Y 2008-09 ARE REJECTED AS COMPARABLES. THE TPO HAS EXCLUDED ALL THOSE COMPANIES WITH PERSISTENT LOSSES/DIMINISHING REVENUES AS IT S ECTOR IS GROWING AT A CARG (COMPOUNDED ANNUAL GROWTH RATE) OF MORE THAN 5 0% DURING THE LAST 10 YEARS OR AT LEAST FOR THE LAST HERE YEA RS. FURHTER, THE LD.D.R ITA NO.1026/MDS./2014 :- 20 - : POINTED OUT THAT THE ASSESSEE IS REMUNERATED ON COS T PLUS BASIS I.E. IT IS A COST PROTECTED ENTITY. THEREFORE, M/S.ALLSEC TECHNOLOGIES LTD., CANNOT BE COMPARED WITH THE FINANCIAL HEALTHY COMPA NY LIKE ASSESSEE. LD.D.R SUBMITTED THAT THE DRP FINDS THE REASONS GIV EN BY THE TPO AS PROPER TO EXCLUDE THIS COMPANY AS COMPARABLES AND T HEREFORE, THE DRP DECLINES TO GIVE ANY DIRECTION TO THE TPO. 4.6.2 WE HAVE HEARD BOTH THE PARTIES AND PERUSED T HE MATERIAL ON RECORD. IT IS ADMITTED FACT THAT FINANCIALS OF M/S. ALLSEC TECHNOLOGIES LTD., SHOWS LOSS. THIS TRIBUNAL CONSISTENTLY HOLDI NG THAT LOSS MAKING COMPANY CANNOT BE CONSIDERED AS COMPARABLE WITH PRO FIT MAKING COMPANIES. FOR THIS PURPOSE, WE PLACE RELIANCE ON THE CO-ORDINATE BENCH OF HYDERABAD IN THE CASE OF CAPITAL IQ INFORM ATION SYSTEMS (INDIA) PVT. LTD., VS. DCIT(INT. TAXATION) REPORTED IN 25 ITR (TRIB) 185 (ITAT[HYD]) WHEREIN HELD THAT COMPANIES WITH SUPER PROFIT OR HIGH TURNOVER OR LOSS MAKING COMPANIES CANNOT BE CONSIDE RED AS COMPARABLE. FURTHER, IT WAS HELD THAT WHENEVER THER E IS AN EXTRAORDINARY EVENT LIKE MERGER/DEMERGER OR EMERGEN CY, SUCH COMPANIES CANNOT BE CONSIDERED AS COMPARABLE. IN V IEW OF THIS, WE ARE NOT FULLY IN AGREEMENT WITH FINDINGS OF THE LOW ER AUTHORITIES ON THIS ISSUE. ACCORDINGLY, WE ARE HOLDING THAT M/S.ALLSEC TECHNOLOGIES LTD., CANNOT BE CONSIDERED AS COMPARABLE. HENCE, THE GROU ND OF THE ASSESSEE IS REJECTED. ITA NO.1026/MDS./2014 :- 21 - : 5.1 THE NEXT GROUND IS WITH REGARD TO NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE ASSESSEE AND ITS COMPARABLES. 5.2 ACCORDING TO LD.A.R, THE TPO ERRED IN IGNORING THE DIFFERENCE IN RISK PROFILES OF THE ASSESSEE AND ITS COMPARABLE CO MPANIES AND IN NOT PROVIDING ANY RISK ADJUSTMENT IN THIS REGARD. HE P LACED RELIANCE IN THE CASE OF M/S.HELLOSOFT INDIA (P.) LTD. VS. DCIT REPO RTED IN [2014] 148 ITD 669 (ITAT[HYD]). 5.3 ON THE OTHER HAND, LD.D.R SUBMITTED THAT ITS C OMPARABLE COMPANIES AND IN NOT PROVIDING ANY RISK ADJUSTMENT IN THIS REGARD ALLOW THE SAME. LD.D.R SUBMITTED THAT IN SO FAR AS RISK ADJUSTMENT IS CONCERNED, IT CANNOT BE ALLOWED. UNLESS IT IS ESTA BLISHED THAT THERE IS DIFFERENCE IN RISK LEVEL OF THE ASSESSEE AND THE UN CONTROLLED COMPARABLES RISK ADJUSTMENT CANNOT BE ALLOWED. LD. D.R SUBMITTED THAT THE DRP FINDS THAT THE ASSESSEE COULD NOT SATI SFACTORILY PROVE THAT THERE IS DIFFERENCE IN THE RISK LEVEL AND UPHOLDS T HE APPROACH OF THE TPO. 5.4 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. SIMILAR ISSUE IS CONSIDERED BY THE CO-ORDIN ATE BENCH OF THE ITA NO.1026/MDS./2014 :- 22 - : TRIBUNAL IN THE CASE OF M/S.HELLOSOFT INDIA (P.) LT D. VS. DCIT CITED SUPRA WHEREIN HELD AS FOLLOWS:- 18. AS REGARDS 4TH ISSUE RELATING TO RISK FILTER, A S SUBMITTED BY THE LEARNED AR, THIS ISSUE IS ALSO COVERED BY THE DECISION OF T HE COORDINATE BENCH IN ASSESSEE'S OWN CASE FOR AY 2005-06 AND 2006-07 (SUP RA), WHEREIN THE COORDINATE BENCH VIDE PARA 17, HELD AS FOLLOWS: '17. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES I N THIS REGARD. THE MATERIALS ON RECORD CLEARLY PROVE THE FACT THAT THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER. IT HAS TRANSACTIONS ONL Y WITH ITS AE. IT IS ALSO A FACT THAT ALL THE RISKS LIES WITH THE AE. DIFFERENT BENCHES OF THE TRIBUNAL HAVE ALSO TAKEN A DIVERGENT VIEW ON THIS ISSUE. THE INCOME-TAX APPELLATE TRIBUNAL, MUMBAI BENCH IN THE CASE OF SIMONTECH (SUPRA) HAS HELD THAT NO SEPARATE ADJUSTM ENT IS REQUIRED ON ACCOUNT OF RISK AND FUNCTIONAL DIFFEREN CE, THE INCOME- TAX APPELLATE TRIBUNAL DELHI BENCH IN THE CASE OF S ONY INDIA (P.) LTD. V. DY. CIT [2008] 114 ITD 448 HAS HELD THAT DE DUCTION ON ACCOUNT OF OWNERSHIP OF INTANGIBLES, RISK FACTORS C AN BE ALLOWED. IN AFORESAID VIEW OF THE MATTER, WE ARE INCLINED TO ACCEPT THE VIEW FAVOURABLE TO THE ASSESSEE. WE THEREFORE UPHOL D THE DIRECTION OF THE CIT (A) IN THIS REGARD IN ALLOWING THE BENEFIT OF RISK ADJUSTMENTS AT 1%. ACCORDINGLY, THE GROUND RAI SED BY THE DEPARTMENT IS DISMISSED.' ITA NO.1026/MDS./2014 :- 23 - : ACCORDINGLY, WE DIRECT THE TPO TO ALLOW RISK ADJUST MENT AT 1% AS DECIDED IN THE CASE OF M/S.HELLOSOFT INDIA (P.) LTD . VS. DCIT. THIS GROUND IS PARTLY ALLOWED. 6.1 THE LAST GROUND IS WITH REGARD TO THE AO /TPO ERRED IN HOLDING INELIGIBLE THE CARRY FORWARD OF CURRENT YEAR UNABSO RBED DEPRECIATION OF THE ASSESSEE. 6.2 THE LD.A.R SUBMITTED THAT THE ASSESSEE ADJUST ED THE 10A CLAIM BEFORE ADJUSTING THE DEPRECIATION AS PER THE IT ACT , THUS RESTRICTING THE DEPRECIATION CLAIM OF ` 2,63,35,680/- TO THE BALANCE AVAILABLE PROFITS OF ` 33,33,422/-. THE BALANCE AMOUNT OF DEPRECIATION OF ` 2,30,02,258/- HAS BEEN CARRIED FORWARD AS CURRENT YEAR LOSS. THE LD.A.R SUBMITTED THAT THE AO CONSIDERED THIS IMPROPER AND OPINED THA T THE ASSESSEE HAS NO DEPRECIATION LOSS. THE LD.A.R SUBMITTED THAT TH E AO HAS TO CONSIDER THE SEC.10A BENEFITS TO BE CALCULATED PER UNIT AS PER THE PROVISIONS OF THE ACT. LD.A.R RELIED ON THE FOLLOWING CASE LA WS IN SUPPORT OF HIS CONTENTION. I ) SCIENTIFIC ATLANTA INDIA TECHNOLOGY (P) LTD. VS.A CIT [2010] 129 TTJ (CHENNAI)(SB) 273. II) CIT VS. YOKOGAWA INDIA LLTD (2012) 341 ITR 385 (KAR.) ITA NO.1026/MDS./2014 :- 24 - : III) CIT VS. BLACK & VEATCH CONSULTING PVT. LTD., ( 2012) 348 ITR 72(BOM.) IV) VALUEPROCESS TECHNOLOGIES (I) (P) LTD. VS. ITO IN ITA APPEAL NO. 5343/MUM/2010. 6.3 ON THE OTHER HAND, LD.D.R DREW OUR ATTENTION T O THE FINDINGS OF THE DRP THAT THE PANEL HAS CONSIDERED THE FACTS OF THE CASE AND DECISIONS OF THE SPECIAL BENCH OF ITAT AND KARNATAK A HIGH COURT AS CITED BY THE ASSESSEE. LD.D.R SUBMITTED THAT THE P ANEL OBSERVED THAT THE HONBLE SUPREME COURT HAS RECENTLY IN THE CASE OF HIMATSINGKA SEIDE DISMISSED THE APPEAL AGAINST THE ORDER OF HON BLE KARNATAKA HIGH COURT WHEREIN HELD THAT EXEMPTION U/S.10A CANN OT BE ON COMMERCIAL INCOME AS IT HAS TO COMPUTE AS PRESCRIBE D UNDER THE ACT. THE LD.D.R SUBMITTED THAT THE PANEL FOLLOWING THE J UDGEMENT OF SUPREME COURT DECLINES TO INTERFERE WITH THE ACTION OF THE AO IN THIS REGARD AND DISMISSED THIS GROUND. 6.4 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THIS ISSUE IS SQUARELY COVERED BY THE JUDG EMENT OF SUPREME COURT IN THE CASE OF HIMATSINGKA SEIDE. IT IS HELD BY THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. HIMATSI NGKA SEIDE REPORTED IN 286 ITR 255 HELD THAT BROUGHT FORWARD D EPRECIATION HAD TO ITA NO.1026/MDS./2014 :- 25 - : BE ADJUSTED AGAINST THE PROFIT OF THE EOU BEFORE CO MPUTING EXEMPTION ALLOWABLE U/S.10B OF THE ACT. ON FURTHER APPEAL TH E SUPREME COURT, IT WAS DECIDED AGAINST THE ASSESSEE. HENCE, THIS GROU ND IS DISMISSED. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH MAY, 2016, AT CHENNAI. SD/ - SD/ - ! ' # . $ %& ' ( DUVVURU RL REDDY ) ) % / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER () / CHENNAI *+ / DATED: 27 TH MAY, 2016 K S SUNDARAM +,-- ./-0/ / COPY TO: - 1 . / APPELLANT 4. - 1 / CIT 2. / RESPONDENT 5. /23- 4 / DR 3. - 1-!' / CIT(A) 6. 3&-5 / GF